We spent a day recently with a group of advisors who cling to all the orthodoxies of financial services (Modern Portfolio Theory, static asset allocation, etc.). According to them, all you need to do is divide up your money into a bunch of style boxes (e.g. large company value stocks) and keep it there. We know that this has been a dangerous belief for the last decade and we think it will continue to be dangerous in the future.   But, it got us thinking about what people still call “modern”.

Modern Portfolio Theory basically states that the selection of assets (stocks, bonds, and cash) is the major factor in determining risk and return for a portfolio. It was developed in the 1950s by Harry Markowitz. That is over 50 years ago. Is it time to re-consider whether we need something even more “modern”? Markowitz, of course, never talked about the style boxes that have become part of the orthodoxy of financial services. Style boxes were invented by Morningstar in the early 1990s. So, a marketing scheme that was invented more than thirty years later has come to be considered by many financial advisors to be an essential part of “modern portfolio theory”. What else has transpired since this modern theory was published?

Hawaii and Alaska became states the year that Markowitz’ book was published.

WalMart was founded in 1969, a decade later.

The NASDAQ stock exchange began in 1971.

The first color television broadcast was in 1974, 25 years after the “modern” theory.

The term personal computer was first coined in 1975.

Enron did not come into existence until 1985.

The World Wide Web was invented in 1989.

So, we shouldn’t throw out Markowitz’ theory because of its age, but we need to consider whether or not it still applies and perhaps tweak it a bit if it is to be relevant in the 21^st century. A few things may have changed during the past 50 years! Perhaps most importantly, his message has been transformed to mean what the financial services industry wanted it to mean rather than what he actually said. He never told anyone to fill a bunch of artificial “style boxes” and hold on to overpriced assets in a bear market. That would not be a Nobel Prize winning concept.